Chapter 19, B. Policy Buy-Back

• Jurisdiction: United States

B. Policy Buy-Back

In conjunction with this settlement, an insurer may seek a policy buy-back. Unlike a payment of claims, a policy buy-back involves the insurer literally purchasing its policy from the debtor, then voiding it. While certain states allow an insurer to buy back its policy, nothing is as complete as a buy-back through the bankruptcy system due to debtor's ability to sell property "free and clear" of claims and interest.⁴⁹⁷

Upon the filing of a bankruptcy petition, all of the debtor's assets become property of the estate.⁴⁹⁸ The debtor, in turn, is allowed to use or sell any asset of the bankruptcy estate.⁴⁹⁹ The debtor, however, can only sell property of its bankruptcy estate. Section 541(a) generally defines property of the estate as "all legal and equitable interests of the debtor in property as of the commencement of the case." Courts have recognized that insurance policies are property of a debtor's estate that may be sold with court approval under § 363 of the Bankruptcy Code.⁵⁰⁰

A typical settlement is usually only binding on the parties that enter into the settlement. However, the unique aspect about the policy buy-back is that it is binding upon all claimants (provided they had notice), regardless of whether they participated in the bankruptcy or whether they even asserted a claim against the debtor. This is due to § 363(f) of the Bankruptcy Code, which allows for the "free and clear" sale of property provided that at least one of five conditions is met:

1. applicable nonbankruptcy law permits sale of such property free and clear of such interest;
2. such entity [holding an interest] consents;
3. such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
4. such interest is in bona fide dispute; or
5. such entity [holding an interest] could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.⁵⁰¹

Unless a claimant holds a judgment against the debtor or is in a direct-action state, the claimants do not have an independent right to insurance proceeds. This means that a number of conditions for the approval of a free-and-clear sale can be readily established.⁵⁰²

In a quintessential policy buy-back, the insurer purchases the policy free and clear of all claims and interests, meaning that no party is ever able to make or assert any type of claim against the insurer-purchaser that relates to the purchased...